Pros and Cons of Incubator Funding These centers provide not only capital, but also a great location to launch your new business.
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Prior to launch, new businesses have to hire people; registerthe business name; formally organize the company as an Sub-Scorporation, C corporation, limited partnership or LLC; and getbanking services in place. Entrepreneurs also have to set up:
- Office space for managers and staff.
- Lobby and reception space.
- Meeting and conference space (white board, projector-screencapability).
- Communications infrastructure (phones, fax, internet).
- Computing capabilities (PCs, networks).
- Website hosting.
- Postal and overnight delivery addresses.
- Document processing.
And, most importantly, the venture has to get funded. For moststartups, getting everything in place is a major headache. But formany emerging companies, launching at an incubator might be theone-stop solution to all the tasks outlined above.
Incubators are essentially ready-to-go space and supportinfrastructure for startup companies. They also may have afull-time incubator support staff to help you and your personnelwith finance, marketing, sales, IT, strategy and other areas ofoperations. Under one roof, entrepreneurs can have turnkey accessto professional reception and waiting area, mailboxes, parcelpickup, office space, meeting and conference rooms, and access toall the hardware and gadgets needed to conduct daily business.
Remember, a business incubator is itself an entrepreneurialventure, as investors have pooled their funds to secure a largebuilding and outfit the space with its own support team andeverything needed for dozens of startups to engage in business. Theincubator generates revenue by charging monthly rental-access feesto the tenant companies.
But many incubators also have investment capital as part oftheir overall buffet of goods and services for entrepreneurs,taking an equity and/or debt position in incubator companies,thereby creating a portfolio of investment positions that providesome significant upside potential to the incubator'sinvestors.
Having provided consulting services to more than 125entrepreneurial growth companies since 1984, I'm very wellacquainted with a wide range of incubator types and sizes used bymore than a dozen of my clients. I also have hands-on knowledgefrom the insider's perspective, as a founding member of theAdvisory Board for the Santa Barbara Technology Incubator (SBTi), whichopened in late 1999. And I'm an incubator alum who launched myown company--TechKnowledge Point Corp.--at SBTi in 2001. (We"graduated" to our own facility one year later.)
There are, of course, both pros and cons to securing capitalfunding from the operating partners at the incubator.
The benefits include having a hands-on team of incubator supportstaff working closely with you and your company. The staff worksfor the incubator partners, so they have a vested interest inseeing your firm succeed, beyond simply collecting rent on yourspace. Other startups in the incubator who are also in theinvestors' portfolio of companies can also develop with you agood degree of camaraderie among the many entrepreneurs, companyemployees and the support staff, as all parties get to see tangibleevidence every day of each other's struggling and working hardto be successful. The incubator investment team will also likelyhave a wide range of network referrals with specific expertise thatyour firm can tap into. After all, the investors want the incubatedcompany to grow and be profitable, so once again the vested capitalstake can serve as a powerful link to bridge your operating andstrategic needs to knowledgeable and well-connected professionalsin your industry and market space. And finally, the incubatorinvestors may also like to take an additional personal investmentstake in your firm or have excellent referrals to serious qualifiedinvestors who will have interest in your firm.
But the irony is that many of those benefits can also be reasonsnot to do capital funding through an incubator. The incubator staffand management team might actually end up being more of adistraction to you and your personnel, as they may exhibit strongerallegiances to the incubator investment manager, whose perspectivesand expectations for company direction and plans may be at oddswith those of the entrepreneur. There could be various forms ofmicromanaging from the incubator personnel and/or investors, withthe pervading feeling that the site staff, investment manager andeven incubator shareholders are always looking over your shoulderto monitor business progress.
The decision to get capital through an incubator'sinvestment fund must be carefully evaluated, regarding bothtangible financial and other intangible costs to the startupbusiness. But the right fit and situation could also be the perfectplace from which to gain both money to implement your businessplan, and the market/industry traction in those critical earlymonths of the launch, that are together the keys to yoursuccess.
David Newton is a professor of entrepreneurial finance andhead of the entrepreneurship program, which he founded in 1990, atWestmont College in Santa Barbara, California. The author of fourbooks on both entrepreneurship and finance investments, David wasformerly a contributing editor on growth capital for IndustryWeek Growing Companies magazine and has contributed to suchpublications as Entrepreneur, Your Money,Success, Red Herring, Business Week, Inc.and Solutions. He's also consulted to nearly 100emerging, fast-growth entrepreneurial ventures since 1984.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.